The Chinese Housing Bubble Could Burst
October 26, 2010 in China, housing bust | Tags: Beijing, China, housing bust, Milwaukee, purchasing power parity, Shanghai, Swiss franc | 1 comment (Edit)
Just back from 2 weeks in China, I came away with one overwhelming impression: China is temporarily hyping its economy building millions of urban residences that won’t be filled, creating a housing bubble that will make the one in the U.S. pale into insignificance. This brand new city of high rises along the Yangtze River in central China, for example, is just 5 years old and has a population of 600,000, larger than Milwaukee. Everywhere we went, from Shanghai and Beijing to cities in the interior, construction cranes span the horizon and modern highrises crop up in clusters that could house another 20,000 here or 50,000 there. 80% of the Chinese are rural, and 15 million a year move into cities in search of jobs in new and growing industries. By 2004, China had 108 cities with populations over one million, and that will swell to 221 such cities by 2025, vs. 35 in all of Europe. My feeling is that jobs won’t grow fast enough to keep up with the housing boom, and I understand from a recent article (http://www.zerohedge.com/article/next-chinas-property-bubble-step-function-explosion-vacant-inland-cities) that there are already 65 million vacant new urban homes in China. Building all these homes employs a lot of people, generates a lot of investment in construction and artificially makes the economy seem more active and prosperous than it is. But how long can China get away with a currency with buying power 40% below the dollar, and nearly 70% below the Swiss franc? As purchasing power tries to balance out, the demand for cheap Chinese goods may falter, industrial growth may slow, and China will have a housing bust to end all busts. Then what will the central planners do — manage another people’s revolution? My sense is that China’s growth is going too fast, and is being forced beyond what markets will absorb. China’s urbanization is impressive, but in my book, excessive.

We returned from a grand tour of China nearly two years ago, and the one overwhelming economic perspective I’d gained was that China was experiencing a housing bubble that was near the bursting point. Today’s headlines indicate this is still true, and an explosion of the Chinese housing bubble could have economic repercussions for the U.S. every bit as great, or greater, than the risks of European economic meltdown. I’m not sure there is much we could do about it — the bricks and mortar in China are set in place, and the shelves at U.S. Walmarts are currently crammed with Chinese goods.

Here’s my first-hand observations upon returning from China in 2010, as reported in my blog then:

Just back from 2 weeks in China, I came away with one overwhelming impression: China is temporarily hyping its economy building millions of urban residences that won’t be filled, creating a housing bubble that will make the one in the U.S. pale into insignificance. This brand new city of high rises along the Yangtze River in central China, for example, is just 5 years old and has a population of 600,000, larger than Milwaukee. Everywhere we went, from Shanghai and Beijing to cities in the interior, construction cranes span the horizon and modern highrises crop up in clusters that could house another 20,000 here or 50,000 there. 80% of the Chinese are rural, and 15 million a year move into cities in search of jobs in new and growing industries. By 2004, China had 108 cities with populations over one million, and that will swell to 221 such cities by 2025, vs. 35 in all of Europe. My feeling is that jobs won’t grow fast enough to keep up with the housing boom, and I understand from a recent article (http://www.zerohedge.com/article/next-chinas-property-bubble-step-function-explosion-vacant-inland-cities) that there are already 65 million vacant new urban homes in China. Building all these homes employs a lot of people, generates a lot of investment in construction and artificially makes the economy seem more active and prosperous than it is. But how long can China get away with a currency with buying power 40% below the dollar, and nearly 70% below the Swiss franc? As purchasing power tries to balance out, the demand for cheap Chinese goods may falter, industrial growth may slow, and China will have a housing bust to end all busts. Then what will the central planners do — manage another people’s revolution? My sense is that China’s growth is going too fast, and is being forced beyond what markets will absorb. China’s urbanization is impressive, but in my book, excessive.

Back in the early 90s, when Warren Buffet owned a $1.5 billion position in McDonald’s stock, he called my office and asked for a little help. It seemed that he and his friend Bill Gates and their families were planning a vacation trip to China, and had chartered a Chinese train to carry them across the country. Buffet was a McDonald’s fan, and asked if we could guide him to our restaurants along his route. We helped make it easy for he and his party to drop in at a McDonald’s whenever their hunger for hamburgers and fries arose. He talked about that trip for years.

By 2008, Buffet had invested $200 million in Chinese transportation, in a major Chinese car company, BYD, which was developing technology and production capability to build electric cars. By the way, BYD means Build Your Dreams. Really. BYD is slow getting off the mark, but they may yet become a factor in the electric car revolution.

Now, in 2012, Buffet appears on Chinese State Television, wishing the country well in their Year of the Dragon Chinese New Years celebration. And then he appears, in the same broadcast, playing his ukulele (http://blogs.wsj.com/deals/2012/01/23/see-warren-buffett-sing-and-play-the-ukulele/) in front of a model railroad, singing “I’ve been working on the railroad.” With the background that we know Buffet likes trains, including trains in China, and that Berkshire Hathaway not long back invested $20 billion in the Burlington Northern railroad over here, I wonder if he’s sending a signal that he may now be interested in getting financially involved somehow in the rails in China?

July 1 is a big day. It is not only the beginning of the U.S. Federal fiscal year, and my own birthday, but it is the 90th birthday, this year, of the Chinese Communist Party, founded in Shanghai in 1921. We spent two weeks touring China 8 months ago, and couldn’t help but note the urban explosion of housing, industry and private business, yet within a context of central state planning. Millions were pouring into the cities from rural China, and construction cranes blacked out the urban horizons. How long could China hype its economy, we wondered. This weeks Economist Magazine (June 21-July 1) attempts to explore what comes next for China in a brilliant 14-page special report. The big question: will the newly empowered Chinese middle-class and the Communist Party find common ground to move forward together, or will a new era of repression result?

Founding place of Chinese Communist Party, 7/1/1921

I wrote a blog on what we saw as the Chinese housing bubble, on Oct. 28, last year, shortly after we returned from our visit to Shanghai, Beijing and points between. Here it is: The Chinese Housing Bubble Could Burst
October 26, 2010 in China, housing bust | Tags: Beijing, China, housing bust, Milwaukee, purchasing power parity, Shanghai, Swiss franc (Edit)
Just back from 2 weeks in China, I came away with one overwhelming impression: China is temporarily hyping its economy building millions of urban residences that won’t be filled, creating a housing bubble that will make the one in the U.S. pale into insignificance. This brand new city of high rises along the Yangtze River in central China, for example, is just 5 years old and has a population of 600,000, larger than Milwaukee. Everywhere we went, from Shanghai and Beijing to cities in the interior, construction cranes span the horizon and modern highrises crop up in clusters that could house another 20,000 here or 50,000 there. 80% of the Chinese are rural, and 15 million a year move into cities in search of jobs in new and growing industries. By 2004, China had 108 cities with populations over one million, and that will swell to 221 such cities by 2025, vs. 35 in all of Europe. My feeling is that jobs won’t grow fast enough to keep up with the housing boom, and I understand from a recent article (http://www.zerohedge.com/article/next-chinas-property-bubble-step-function-explosion-vacant-inland-cities) that there are already 65 million vacant new urban homes in China. Building all these homes employs a lot of people, generates a lot of investment in construction and artificially makes the economy seem more active and prosperous than it is. But how long can China get away with a currency with buying power 40% below the dollar, and nearly 70% below the Swiss franc? As purchasing power tries to balance out, the demand for cheap Chinese goods may falter, industrial growth may slow, and China will have a housing bust to end all busts. Then what will the central planners do — manage another people’s revolution? My sense is that China’s growth is going too fast, and being forced beyond what markets will absorb. China’s urbanization is impressive, but in my book, excessive.

I suppose it’s just coincidence that at 12:30PM today, just as Chinese President Hu Jintao and U.S. President Obama were about to step up to the podiums for their major press conference in D.C., that beginning with CNN and then extending to all news channels, my DirecTV satellite system lost it’s signals. It’s a clear, windless say here in southeastern Wisconsin. Then I went to the computer and set it to CNN — again the signal speed (the high speed computer system runs through land lines) slowed to a crawl, so I could get but an odd word here or there of the live feed news conference now in session. I’m not a conspiracy theorist, but it just seemed odd that all this interference occurred right at that moment of this key live news conference. I’m sure there is no relationship with how the Chinese block media signals of content they don’t want their people to hear.

Except from article “Democracy: Made in China” by erudite author Steven Hill (www.steven-hill.com):

“Perhaps if their belief in democracy is strong and ecumenical enough, the youths of China will find a way to take their country down a path toward greater popular sovereignty.

“It remains to be seen how much of the “new China” will continue to emerge as this drama plays out, but it’s very likely that any Chinese democracy will have its own unique characteristics; it is unlikely to be an exact copy of the Western model, and it will take its time arriving. China is both a modern state and an ancient civilization that, after all, has shown an almost pathological degree of patience and forbearance.

“This is the nation where Zhou Enlai, the legendary prime minister under Mao, was asked what he thought of the French Revolution and is said to have replied: “It’s too early to tell.”

“The same could be said for the prospects of representative democracy in China.”

Chongqing, the world’s largest municipal area with a population approaching 34 million has let a contract under its Safe City program to install 500,000 video surveillance devices. 1984 is coming to Chongqing, as one of China’s leading manufacturing hubs (cars, computers, defense) catches up to the future. However, with its dense air pollution, which we experienced in October, it may take even more cameras to see all that is going on in this sprawling population center.